A case study of abnormally priced trades between the U.S. and the LAC Methodology, results, and...

A case study of abnormally priced trades between the U.S. and the LAC

Methodology, results, and their implications for Partner Countries

Simon J. PakAssociate Professor of Finance

The Pennsylvania State UniversitySchool of Graduate Professional Studies

Tel: (610)725-5343 email: [email protected]

Seminar on Public Finances and Tax Evasion in Latin America

ICEFI, Tax Justice Network and Poder CiudadanoUnder the auspices and participation of

the European Union, ITC-GTZ, SOMO, KEPA and LatindaddAntigua, 25-26 August 2010

mailto:[email protected]

Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010… 2

Outline

Abnormally priced export and import Guatemala’s export examples – Bananas and Coffee Guatemala’s import examples – Wheat and Light

Crude Oil Causes and Effects of abnormal trade pricing

Detection methods of abnormal pricing Arm’s length price (ALP) data Price filter matrix – a statistical approach

Estimates of capital flows through abnormal pricing: LAC countries vs. U.S.

Non-quantified trades Commodities with volatile price movements

Summary Detection system – Price filter matrix & its limitation


Low Priced Banana Export from Guatemala

Photo Source: http://freefoto.org/images/04/29/04_29_8_prev.jpg

In June 2009, Guatemala Exported Bananas to the U.S. 5,098 tons for $1.018 million

Export price: $0.20/Kg Worth $4.338 mm at an Arm’s

Length Price* of $0.85/Kg Underpriced by $3.32 mm $3.32 mm wealth outflow $3.32 mm less taxable

income

* IMF Primary Commodity Prices - Bananas, avg of Chiquita, Del Monte, Dole, US Gulf delivery http://www.imf.org/external/np/res/commod/index.asp

http://freefoto.org/images/04/29/04_29_8_prev.jpg

http://www.imf.org/external/np/res/commod/index.asp


2009 Guatemala Export to the U.S.BANANAS, Fresh (HS code: 0803002020)

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$0.20

$0.30

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$0.50

$0.60

$0.70

$0.80

$0.90

$1.00

2009 Guatemala Export to the U.S.Bananas, Fresh (HS code:0803002020)

Year.

Mo

Price per KG

Un

de

rpri

ce

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Total Bananas export in 2009: export value = $431 mmamount underpriced = $514 MM (=120% of total export value)

IMF price data

All Underpriced!


Bananas Export - Underpriced Amounts

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$100,000,000

$200,000,000

$300,000,000

$400,000,000

$500,000,000

$600,000,000

$700,000,000

Amount Underpriced Annually throughBananas Export from Guatemala to the U.S.

10-year total: export amount $2.75 BNUnderpriced amount: $3.3 BN (120% of exp amt)(Reference monthly prices from IMF Primary Commodity Prices)


Guatemala Coffee Export – Abnormally Priced

2009 Guatemala Export to the U.S.Coffee, Arabica, not roasted, not decaffeinated (HS10: 0901110010)

MonthQuantity

(Kg)amount Price

Ref price (IMF, cif)

Price ratio

Amount Over-priced

Amount Under-priced

Apr 37,950 $55,770 $1.47 $2.97 0.50 56,828$ Aug 113,850 $232,155 $2.04 $3.24 0.63 136,480$ Mar 2,106,225 $7,562,483 $3.59 $2.82 1.27 1,630,090$ Jun 17,250 $91,270 $5.29 $3.18 1.66 36,332$

Photo from http://t1.gstatic.com/images?q=tbn:ANd9GcRPJx5oD_V-khSV-Mud4ppc8NN3opoGeilZBOoW7bSg5tA64tc&t=1&usg=__bBNVm4pnnWKpUxWTtODqYp2TUus=

Underpriced by $56,828 $56,828 wealth outflow $56,828 less taxable income

Overpriced by $1.63 mm $1.63 mm wealth inflow $1.63 mm more taxable income

http://t1.gstatic.com/images?q=tbn:ANd9GcQXKI_8iLMl3KWq4QVy-BzZqa9u-Q_gZpFF3-iRx_2RT855crI&t=1&usg=__8QhyxjPtr2AFW3bV-jeac_ur2q8




2009 Guatemala Export to the U.S.COFFEE, ARABICA, NOT ROASTED, NOT DECAFFEINATED (HS code: 0901110010)

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$1.00

$2.00

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$6.00

Year.

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(C

IF)

IMF Price for Coffee

Total for 2009: exp value= $287 mmamount underpriced = $5.4 MM (1.9% of exp amt)amount overpriced = $21 MM (7.3% of exp amt)


Coffee Export: under-, overpriced amounts

10-year total amount (Export value $1,897 mm):$69 mm (underpriced, 3.6%) $278 mm (overpriced, 14.7%)(Reference monthly prices from IMF Primary Commodity Prices)

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$0$5,000,000

$10,000,000$15,000,000$20,000,000$25,000,000$30,000,000$35,000,000$40,000,000$45,000,000$50,000,000

Amount Under-, and Over-priced throughCoffee Export from Guatemala to the U.S.

based on IMF price data

Amount Over priced


Guatemala Oil Import – Abnormally Priced

2008 Guatemala Import from the U.S.Light Fuel Oil: API>25, Sulfur<500PPM (HS10: 2710191005)

MonthQuantity

bblamount Price

Ref price (EIA*)

Price ratio

Amount Over Amount Under

Jan 86,000 $3,864,840 $44.94 $100.91 0.45 -$ 4,813,420$ Sept 282,722 $38,167,470 $135.00 $128.30 1.05 1,894,237$ -$

Photo from http://www.freefoto.com/images/13/07/13_07_10_prev.jpg

Underpriced by $4.81 mm $ 4.81 mm wealth inflow $ 4.81 mm more taxable

income Overpriced by $1.89 mm

$ $ 1.89 mm wealth outflow $ $ 1.89 mm less taxable

income* EIA Ref Price: No.2 Fuel Oil, not Diesel, monthly max/min prices



2008 Guatemala Import from the U.S.LIGHT FULE OILS 25 DEG API (HS code: 2710191005)

Total for 2008: exp value = $ 502 mm Overpriced amount = $6.0 MM (1.2%) --- negligibleUnderpriced amount = $11.7 MM (2.3%) --- negligible

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$180

2008 Guatemala Import from the U.S.LIGHT FUEL OILS 25 DEGREES API (HS code:

2710191005)

Yea

r.M

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Price per BBL

Minimum monthly spot price (DOE/EIA)

Maximum monthly spot price (DOE/EIA)


Light Fuel Oil Import: under-, overpriced amounts

7-year total amount: import value = $769 mmunderpriced = $24 mm (3.1%) overpriced = $11 mm (1.5%)(Reference monthly prices from IMF Primary Commodity Prices)

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$0

$2,000,000

$4,000,000

$6,000,000

$8,000,000

$10,000,000

$12,000,000

$14,000,000

Light Fuel Oil Import from the U.S.based on EIA price data (HS

code:2710191005)Amount Overpriced

Amount Underpriced


Guatemala Wheat Import – Abnormally Priced

2009 Guatemala Import from the U.S.Wheat (HS10: 1001902055)

MonthQuantity

Tonamount Price

Ref price (IMF)

Price ratio

Amount Over Amount Under

March 6,078 $1,084,202 $178.38 $230.98 0.77 -$ 319,694$ March 29,600 $8,998,889 $304.02 $230.98 1.32 2,161,881$ -$

Photo from http://www.freefoto.com/images/9905/07/9905_07_5_prev.jpg

Underpriced by $319,694 $ 319,694 wealth inflow $ 319,694 more taxable

income Overpriced by $2.16 mm

$ $ 2.16 mm wealth outflow $ $ 2.16 mm less taxable

income




2009 Guatemala Import from the U.S.Wheat (HS code: 1001902055, m. ton)

Total for 2009: Import value = $ 85.9 mm overpriced amount = $12.5 MM (14.6%)

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2009 Guatemala Import from the U.S.Wheat (HS code:1001902055, USD/MTon)

Year.Mo

Price per ton

IMF Price Data


Wheat Import: under-, overpriced amounts

10-year total amount: imp value = $675 mmunderpriced = $7.6 mm (1.1%) overpriced = $63 mm (9.3%)(Reference monthly prices from IMF Primary Commodity Prices)

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$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

Wheat Import from the U.S.based on IMF price data (HS code:

1001902055)Amount OverpricedAmount Underpriced


Effects of Abnormally Priced Trades

EXPORT Underpriced Export Overpriced Export

Exporter Lower revenue Lower profit

• Higher revenue• Higher profit

Government Capital outflow Lower income tax revenue

Capital inflow Higher income tax revenue

IMPORT Overpriced Import Underpriced Import

Importer Higher COGS Lower profit Higher duty

Lower COGS Higher profit Lower duty

GovernmentCapital outflowLower income tax revenueHigher duty revenue

Capital inflow Higher income tax revenue Lower duty revenue


What Causes Trade Abnormal Pricing?

May be related to Capital flight Import duty fraud Income tax avoidance / Transfer pricing Money laundering

Other Explanations: Clerical/Recording errors Product heterogeneity for a given HS10

code $25,000 fax machine from Japan –

prototype industrial sample


Outline




Estimates of capital flows through abnormal pricing: LAC countries vs. U.S. (tax haven?)




How to Detect Abnormal Pricing?

“Money Laundering and Income Tax Evasion: The Determination of Optimal Audits and Inspections to Detect Abnormal Prices in International Trade,” Journal of Financial Crime, Vol. 12, No. 2, 2004. (de Boyrie, M.E., Pak, S.J., and Zdanowicz, J. S.)

Audits & Inspections Customs Agents

Lack of benchmark pricing data (arm’s length price) - Difficult to determine abnormality

Pre Shipment Inspection firms All specified inbound cargos inspected

Challenges in Detection Over 70 million transactions annually in U.S. Exports

and Imports Examination of trade documents Physical inspection of cargo Delays in the movement of goods



Alternative Approaches: Computerized Filtering based on benchmark

prices if available Low cost & efficient Accurate

A statistical approach by estimating upper & lower bounds if benchmark prices not available

Low cost and efficient Accuracy depends on the quality of the historical

data in estimating the benchmark upper & lower bound prices



Statistical Approach Estimate the benchmark upper and lower

bounds of prices (Price filter matrix) Based on statistical Analysis of historical prices For each commodity category by country

Transactions with prices outside the benchmark prices

Higher probability of being abnormal than the population

The narrower bounds of the benchmark prices, the more numerous the transactions with prices outside the benchmark prices

Suspected trades with abnormal prices require inspections by Customs agents


DATA SOURCE Import and Export data from U.S. Customs and

Border Protection Most detailed import and export records Not publicly available

U.S. Merchandise Trade Data from U.S. Census Bureau

Publicly available Import and export records grouped by HS10, Partner

country, customs district, and month 8,750 export HS10 codes and 16,703 import HS10 codes in 2009 233 countries in 2009 44 customs district codes

Quantity & Dollar value


Price Filter Matrix - Criteria for Price Abnormality

Price Filter Matrix may be constructed from the U.S. Merchandise Trade data: For each commodity code and each country

The average price, the standard deviation, upper- and lower- bound pricesUpper bound = the mean + as or Upper Quartile

PriceLower bound = the mean - as or Lower Quartile Price

Total Number of Cells in 2009: 5.86 million cellsExport: (8,750 items)x (233 countries) = 2.04 mm cellsImport: (16,703 items) x (229 countries) = 3.82 mm cells


Price Filter Matrix - Bananas U.S. Bananas import

US-World price filter: Upper and Lower quartile prices based on all

U.S. import records from all countries US-Guatemala price filter:

Upper and Lower quartile prices based on all U.S. import records from Guatemala

Compare the results with IMF Bananas price


U.S.-World Quartile Prices (Bananas 2009)

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$0.00

$0.10

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$0.70

$0.80

$0.90


Year.

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Price per KG

Lower Quartile PriceUS-World data

Upper Quartile PriceUS-World data O

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U.S.- Guatemala Quartile Prices (Bananas 2009)

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$0.00

$0.10

$0.20

$0.30

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$0.50

$0.60

$0.70

$0.80

$0.90


Year.

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Price per KG

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Upper Quartile PriceUS-Guatemala data

Lower Quartile PriceUS-Guatemala data

Nor

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Which Arm’s Length Price?IMF, US-World, US-Guatemala

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$0.00

$0.10

$0.20

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$0.70

$0.80

$0.90

$1.00


Year.

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Price per KG

IMF Price

US-Guatemala prices

US-World Prices


Over/Under-priced Amounts, 2000-2009

Gutemala's Export of Bananas to the U.S.

US-Gua US-Wrld IMF US-Gua US-Wrld IMF2000 $10.06 $5.08 $0.45 $5.31 $4.63 $105.472001 $4.30 $2.78 $5.12 $3.30 $256.852002 $3.83 $1.31 $0.05 $10.72 $6.22 $239.322003 $1.58 $0.52 $0.18 $4.40 $2.22 $97.312004 $1.30 $0.27 $0.01 $3.01 $2.20 $278.282005 $3.91 $0.13 $1.68 $3.18 $323.252006 $2.26 $0.00 $1.09 $9.32 $375.402007 $9.28 $0.16 $1.39 $7.88 $443.192008 $8.81 $0.92 $17.41 $14.68 $649.412009 $21.28 $12.51 $17.87 $41.13 $514.50

TOTAL $66.62 $23.68 $0.69 $67.99 $94.76 $3,282.98

YearOverpriced amount ($MM) Underpriced amount ($MM)


2009 Guatemala Export to the U.S.COFFEE, ARABICA, NOT ROASTED, NOT DECAFFEINATED

HS10 code: 0901110010

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$2.00

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Year.

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(C

IF) US-World quartiles

US-Guatemala quartiles

IMF price



Gutemala's Export of Coffee (Arabica) to the U.S.

US-Gua US-Wrld IMF US-Gua US-Wrld IMF2000 $2.10 $3.89 $22.70 $8.83 $3.96 $1.232001 $2.13 $4.17 $13.45 $2.92 $2.39 $10.282002 $4.92 $16.92 $35.28 $1.67 $0.75 $5.372003 $1.96 $13.96 $42.94 $3.90 $2.22 $7.552004 $1.80 $10.81 $43.30 $4.92 $0.65 $5.032005 $1.58 $4.24 $15.70 $6.99 $1.06 $7.512006 $0.59 $2.16 $32.65 $12.44 $3.65 $6.752007 $2.23 $2.23 $30.53 $10.05 $4.22 $8.912008 $1.80 $2.74 $20.76 $14.78 $7.68 $11.012009 $1.93 $0.90 $20.99 $9.17 $0.96 $5.44

TOTAL $21.04 $62.00 $278.29 $75.67 $27.56 $69.08



2009 US Import Prices (cif) from Guatemala

COFFEE, ARABICA, NOT ROASTED, NOT DECAFFEINATED (HS code: 0901110010)

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PRICE

PUPQC

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(C

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2009 Coffee Prices (IMF vs. US Import Price Statistics,cif)IMF: Coffee, Other Milds, El Salvador and Guatemala, ex-dock New York

US-Guatemala Price: Coffee, Arabica, not roasted, not decaff HS10: 0901110010

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$2.00

$2.50

$3.00

$3.50

$4.00

PUPQC

PLOQC

Year.

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(C

IF)


2009 Coffee Prices (IMF vs. US Import Price Statistics, cif)IMF: Coffee, Other Milds, El Salvador and Guatemala, ex-dock New York

US-World Prices: Coffee, Arabica, not roasted, not decaff HS10: 0901110010

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$2.00

$2.50

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PUPQWPLOQW

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(C

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2009 Guatemala Import Prices (f.o.b. US) from the U.S.Wheat (HS: 1001902055, USD/MTon)

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2009 Guatemala Import from the U.S.Wheat (HS code:1001902055, USD/MTon)

PRICE

PUPQW

PLOQW

PUPQC

Year.Mo

Price per ton



Gutemala's Import of Wheat from the U.S.

US-Gua US-Wrld IMF US-Gua US-Wrld IMF2000 $0 $73 $630 $94 $109 $1572001 $271 $413 $1,843 $307 $237 $2822002 $121 $823 $2,237 $198 $56 $9972003 $1 $3,299 $6,490 $44 $379 $8252004 $533 $23 $1,674 $290 $374 $4492005 $1,532 $493 $3,356 $228 $260 $2752006 $5,133 $4,046 $5,070 $661 $283 $1,1212007 $10,159 $3,277 $5,240 $72 $1,161 $1,6492008 $7,057 $4,113 $24,238 $339 $759 $1372009 $4,472 $1,320 $12,357 $140 $1,685 $1,717

TOTAL $29,279 $17,880 $63,134 $2,372 $5,303 $7,610



2008 Guatemala Import Prices (fob US) from the U.S.Light Fuel Oils, not Diesel, 25 DEGREES API (HS: 2710191005)

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2008 Guatemala Import from the U.S.LIGHT FUEL OILS 25 DEGREES API (HS code:

2710191005)

PRICE

PUPQW

Ye

ar.

Mo

Price per BBL

Minimum monthly spot price (DOE/EIA)

Maximum monthly spot price (DOE/EIA)



Gutemala's Import of Light Fuel Oils from the U.S.

US-Gua US-Wrld EIA US-Gua US-Wrld EIA2002 $0.0 $0.9 $0.0 $0.0 $0.0 $0.02003 $0.1 $0.2 $1.3 $0.2 $1.4 $0.62004 $0.1 $8.9 $1.3 $0.0 $0.0 $0.92005 $0.0 $0.7 $0.0 $0.0 $0.0 $0.02006 $0.0 $0.1 $2.1 $1.2 $4.4 $0.62007 $3.1 $0.0 $0.5 $0.0 $25.0 $10.22008 $18.9 $3.6 $6.0 $16.0 $25.6 $11.8

TOTAL $22.2 $14.4 $11.2 $17.4 $56.4 $24.0



Detection of Abnormal Pricing

Physical auditing/inspection Too many to inspect – costly & delayed cargo flow Benchmark prices available for limited number of items

Computerized detection with benchmark prices Low cost and accurate Benchmark prices available only for limited number of items

Computerized detection with statistically estimated Price Filter Matrix Less accurate than with benchmark prices Possible underestimation of abnormality Efficient and low cost detection of importers/exporters with

frequent mispricing when combined with inspection/audit by Customs specialist


Outline




Estimates of capital flows through abnormal pricing: LAC countries vs. U.S. (tax haven?)




Estimates of Capital Flows using Price Filter Matrix

METHOD: Estimate upper and lower quartile prices for:

Every commodity Every country

Calculate overpriced amount and underpriced amount for every trade with prices outside the interquartile range

Aggregate overpriced amounts and underpriced amounts for all trades

CAUTION: The method can’t be applied to non-quantified trades The price filter method will not work for commodities with

volatile benchmark prices such as crude oil in 2008


2009 US Export to LAC - 1

2009 US Export to LAC Countries - Abnormally Priced Amount* Red fonts: Top ten countries in each category

Amount Over

% Amount

Under %

Amount Over

% Amount

Under %

Anguilla 81.1$ 2.2$ 2.7% 1.6$ 1.9% 8.9$ 10.9% 17.9$ 22.1%Antigua and Barbuda 182.6$ 4.6$ 2.5% 3.0$ 1.6% 16.6$ 9.1% 31.0$ 17.0%Argentina 7,537.9$ 359.6$ 4.8% 640.3$ 8.5% 752.2$ 10.0% 893.2$ 11.8%Aruba 680.4$ 23.2$ 3.4% 30.2$ 4.4% 46.9$ 6.9% 87.9$ 12.9%Bahamas 2,760.4$ 123.0$ 4.5% 191.8$ 6.9% 132.1$ 4.8% 376.7$ 13.6%Barbados 498.1$ 23.9$ 4.8% 16.6$ 3.3% 51.4$ 10.3% 92.7$ 18.6%Belize 353.0$ 7.7$ 2.2% 6.8$ 1.9% 29.8$ 8.4% 38.2$ 10.8%Bermuda 821.7$ 39.9$ 4.9% 18.6$ 2.3% 61.6$ 7.5% 125.1$ 15.2%Bolivia 389.1$ 17.4$ 4.5% 17.9$ 4.6% 35.7$ 9.2% 43.4$ 11.1%Brazil 32,910.1$ 2,028.8$ 6.2% 2,435.6$ 7.4% 2,842.0$ 8.6% 3,365.2$ 10.2%British Virgin Islands 309.9$ 6.9$ 2.2% 3.2$ 1.0% 22.1$ 7.1% 50.0$ 16.1%Cayman Islands 745.8$ 17.2$ 2.3% 16.7$ 2.2% 50.4$ 6.8% 75.9$ 10.2%Chile 12,093.5$ 431.1$ 3.6% 555.9$ 4.6% 896.8$ 7.4% 1,010.2$ 8.4%Colombia 11,438.8$ 458.7$ 4.0% 600.6$ 5.3% 845.8$ 7.4% 1,021.3$ 8.9%Costa Rica 5,681.8$ 597.6$ 10.5% 599.7$ 10.6% 939.2$ 16.5% 553.1$ 9.7%Cuba 717.9$ 7.7$ 1.1% 6.7$ 0.9% 27.7$ 3.9% 18.1$ 2.5%Dominica 105.4$ 1.6$ 1.5% 1.8$ 1.7% 8.6$ 8.1% 15.1$ 14.3%Dominican Republic 6,599.1$ 218.3$ 3.3% 328.2$ 5.0% 370.2$ 5.6% 775.8$ 11.8%

Country Name(tax haven* - bold)

US Import Value 2009

US-Country Quartile Prices US-World Quartile Prices

* Tax haven country list from OECD Progress Report 2April2009, http://www.oecd.org/tax/progressreport

http://www.oecd.org/tax/progressreport



2009 US Export to LAC Countries - Abnormally Priced Amount

Amount Over

% Amount

Under %

Amount Over

% Amount

Under %

Ecuador 3,450.2$ 176.1$ 5.1% 171.0$ 5.0% 249.8$ 7.2% 450.7$ 13.1%El Salvador 2,463.7$ 87.0$ 3.5% 115.4$ 4.7% 136.7$ 5.5% 314.4$ 12.8%Falkland Islands 0.8$ 0.0$ 0.6% 0.0$ 0.0% 0.1$ 10.1% 0.1$ 6.5%French Guiana 18.0$ 0.2$ 1.0% 0.1$ 0.8% 1.2$ 6.5% 1.1$ 6.3%Grenada 84.4$ 1.9$ 2.2% 1.9$ 2.3% 9.1$ 10.8% 9.9$ 11.7%Guadeloupe 383.9$ 3.4$ 0.9% 5.9$ 1.5% 28.0$ 7.3% 11.7$ 3.0%Guatemala 4,721.0$ 155.1$ 3.3% 151.5$ 3.2% 268.8$ 5.7% 447.6$ 9.5%Guyana 288.5$ 7.1$ 2.5% 3.3$ 1.1% 19.1$ 6.6% 35.8$ 12.4%Haiti 944.5$ 19.2$ 2.0% 13.9$ 1.5% 44.2$ 4.7% 135.8$ 14.4%Honduras 4,845.6$ 137.4$ 2.8% 119.0$ 2.5% 180.0$ 3.7% 559.7$ 11.6%Jamaica 2,644.3$ 135.4$ 5.1% 102.8$ 3.9% 192.6$ 7.3% 305.6$ 11.6%Martinique 288.8$ 4.9$ 1.7% 9.8$ 3.4% 16.6$ 5.8% 15.5$ 5.4%Mexico 151,538.6$ 5,799.9$ 3.8% 7,123.7$ 4.7% 4,785.9$ 3.2% 17,094.4$ 11.3%Montserrat 8.6$ 0.0$ 0.6% 0.0$ 0.1% 1.4$ 16.4% 0.7$ 7.6%Netherlands Antilles 2,951.4$ 57.9$ 2.0% 102.9$ 3.5% 161.9$ 5.5% 269.3$ 9.1%Nicaragua 1,093.0$ 32.3$ 3.0% 29.5$ 2.7% 69.5$ 6.4% 125.2$ 11.5%Panama 4,913.3$ 219.9$ 4.5% 376.4$ 7.7% 287.7$ 5.9% 547.8$ 11.2%Paraguay 1,610.0$ 28.8$ 1.8% 44.1$ 2.7% 40.5$ 2.5% 174.0$ 10.8%






2009 US Export to LAC Countries - Abnormally Priced Amount

Amount Over

% Amount

Under %

Amount Over

% Amount

Under %

Peru 6,184.1$ 282.6$ 4.6% 282.0$ 4.6% 550.2$ 8.9% 546.5$ 8.8%St Kitts and Nevis 123.9$ 4.8$ 3.8% 2.2$ 1.8% 12.0$ 9.7% 14.3$ 11.5%St Lucia 241.0$ 3.9$ 1.6% 4.8$ 2.0% 16.8$ 7.0% 29.4$ 12.2%St Vincent and the Grenadines 82.7$ 2.5$ 3.0% 0.7$ 0.8% 7.6$ 9.3% 11.2$ 13.5%Suriname 406.3$ 8.7$ 2.2% 25.7$ 6.3% 65.1$ 16.0% 59.2$ 14.6%Trinidad and Tobago 2,251.2$ 118.1$ 5.2% 86.6$ 3.8% 259.1$ 11.5% 295.0$ 13.1%Turks and Caicos Islands 434.4$ 10.0$ 2.3% 18.4$ 4.2% 35.7$ 8.2% 50.8$ 11.7%Uruguay 893.3$ 39.6$ 4.4% 43.4$ 4.9% 87.1$ 9.7% 118.1$ 13.2%Venezuela 12,611.1$ 630.2$ 5.0% 593.8$ 4.7% 1,120.5$ 8.9% 1,159.2$ 9.2%

Country NameUS Import Value 2009



2009 US Import from LAC - 12009 US Import from LAC Countries - Abnormally Priced Amount* Red fonts: Top ten countries in each category

Amount Over

% Amount

Under %

Amount Over

% Amount

Under %

ANGUILLA 5.7$ 0.2$ 3.9% 0.0$ 0.4% 2.8$ 48.7% 0.0$ 0.2%ANTIGUA AND BARBUDA 9.3$ -$ 0.0% -$ 0.0% 0.3$ 3.6% 0.1$ 0.9%ARGENTINA 3,889.8$ 116.1$ 3.0% 110.2$ 2.8% 162.9$ 4.2% 322.1$ 8.3%ARUBA 1,278.2$ 52.3$ 4.1% 10.2$ 0.8% 5.1$ 0.4% 60.4$ 4.7%BAHAMAS 819.6$ 25.5$ 3.1% 13.1$ 1.6% 47.3$ 5.8% 19.5$ 2.4%BARBADOS 32.8$ 0.8$ 2.5% 0.9$ 2.8% 1.4$ 4.2% 80.1$ 244.6%BELIZE 100.4$ 1.2$ 1.2% 2.9$ 2.9% 2.6$ 2.6% 6.2$ 6.1%BERMUDA 13.0$ 0.0$ 0.1% 0.2$ 1.9% 0.6$ 4.6% 1.3$ 10.1%BOLIVIA 504.5$ 8.9$ 1.8% 14.9$ 3.0% 10.8$ 2.1% 15.1$ 3.0%BRAZIL 20,073.9$ 698.6$ 3.5% 1,096.2$ 5.5% 1,039.4$ 5.2% 2,240.0$ 11.2%BRITISH VIRGIN ISLANDS 6.0$ 0.1$ 0.8% -$ 0.0% 0.3$ 4.8% 4.2$ 69.3%CAYMAN ISLANDS 13.6$ 0.0$ 0.3% 0.0$ 0.2% 0.9$ 6.5% 1.0$ 7.7%CHILE 5,950.4$ 171.3$ 2.9% 204.0$ 3.4% 151.9$ 2.6% 546.0$ 9.2%COLOMBIA 11,319.9$ 328.4$ 2.9% 368.9$ 3.3% 443.3$ 3.9% 321.7$ 2.8%COSTA RICA 5,601.4$ 51.1$ 0.9% 484.1$ 8.6% 215.2$ 3.8% 205.4$ 3.7%CUBA 0.0$ -$ 0.0% -$ 0.0% -$ 0.0% -$ 0.0%DOMINICA 2.8$ 0.1$ 4.8% 0.0$ 0.4% 0.4$ 13.5% 0.2$ 6.8%DOMINICAN REPUBLIC 3,328.8$ 92.2$ 2.8% 97.7$ 2.9% 202.0$ 6.1% 269.1$ 8.1%




* Tax haven country list from OECD Progress Report 2April2009, http://www.oecd.org/tax/progressreport

http://www.oecd.org/tax/progressreport


2009 US Import from LAC - 2

2009 US Import from LAC Countries - Abnormally Priced Amount

Amount Over

% Amount

Under %

Amount Over

% Amount

Under %

ECUADOR 5,272.3$ 102.8$ 2.0% 209.1$ 4.0% 167.2$ 3.2% 266.3$ 5.1%EL SALVADOR 1,822.0$ 47.5$ 2.6% 61.0$ 3.3% 53.3$ 2.9% 210.3$ 11.5%FALKLAND ISLANDS 8.3$ 0.0$ 0.5% 5.4$ 65.3% 0.0$ 0.3% 5.6$ 67.8%FRENCH GUIANA 0.1$ -$ 0.0% -$ 0.0% 0.0$ 14.8% -$ 0.0%GRENADA 5.8$ 0.1$ 1.3% 0.0$ 0.3% 0.2$ 3.1% 0.1$ 1.0%GUADELOUPE 1.8$ -$ 0.0% -$ 0.0% 0.2$ 13.7% 0.2$ 12.0%GUATEMALA 3,137.6$ 95.4$ 3.0% 146.2$ 4.7% 136.7$ 4.4% 261.5$ 8.3%GUYANA 168.9$ 3.0$ 1.8% 1.4$ 0.8% 7.7$ 4.5% 30.8$ 18.2%HAITI 552.0$ 12.7$ 2.3% 6.0$ 1.1% 2.9$ 0.5% 175.3$ 31.8%HONDURAS 3,324.0$ 83.4$ 2.5% 100.9$ 3.0% 86.5$ 2.6% 327.9$ 9.9%JAMAICA 465.1$ 11.3$ 2.4% 6.8$ 1.5% 21.2$ 4.6% 180.0$ 38.7%MARTINIQUE 5.0$ 0.0$ 0.1% -$ 0.0% 0.1$ 1.6% 0.8$ 16.6%MEXICO 176,537.0$ 4,857.8$ 2.8% 9,278.3$ 5.3% 5,167.2$ 2.9% 15,456.5$ 8.8%MONTSERRAT 0.9$ 0.0$ 0.0% -$ 0.0% 0.1$ 8.3% 0.5$ 55.3%NETHERLANDS ANTILLES 474.9$ 10.9$ 2.3% 16.4$ 3.5% 18.6$ 3.9% 27.8$ 5.9%NICARAGUA 1,611.3$ 37.8$ 2.3% 55.3$ 3.4% 25.6$ 1.6% 218.4$ 13.6%PANAMA 304.2$ 3.7$ 1.2% 4.7$ 1.5% 7.1$ 2.3% 16.5$ 5.4%PARAGUAY 56.4$ 0.9$ 1.5% 16.6$ 29.4% 1.3$ 2.2% 24.3$ 43.2%




2009 US Import from LAC - 3

2009 US Import from LAC Countries - Abnormally Priced Amount

Amount Over

% Amount

Under %

Amount Over

% Amount

Under %

PERU 4,192.1$ 131.5$ 3.1% 132.0$ 3.1% 258.6$ 6.2% 166.2$ 4.0%ST KITTS AND NEVIS 48.4$ 0.3$ 0.7% 3.8$ 7.9% 4.3$ 9.0% 22.9$ 47.4%ST LUCIA 17.5$ 0.2$ 1.2% 1.8$ 10.2% 0.4$ 2.2% 0.8$ 4.5%ST VINCENT AND THE GRENADINES 1.2$ 0.0$ 1.3% -$ 0.0% 0.1$ 6.4% 0.2$ 13.9%SURINAME 139.0$ 10.4$ 7.5% 0.8$ 0.5% 2.2$ 1.6% 247.1$ 177.8%TRINIDAD AND TOBAGO 5,223.4$ 153.5$ 2.9% 143.1$ 2.7% 181.5$ 3.5% 775.5$ 14.8%TURKS AND CAICOS ISLANDS 10.6$ 0.1$ 0.6% 0.0$ 0.4% 0.1$ 0.6% 0.2$ 1.6%URUGUAY 239.2$ 4.2$ 1.8% 8.1$ 3.4% 22.7$ 9.5% 34.5$ 14.4%VENEZUELA 28,094.4$ 551.0$ 2.0% 521.5$ 1.9% 581.1$ 2.1% 791.9$ 2.8%




Chen/Sunrider was accused of over-invoiced imports Imported herbs at very high prices from

China and Taiwan between 1989 and 1991 to evade U.S. income tax

Two Court Cases IRS vs. Chen/Sunrider: IRS Section 482 violation The US vs. Chen/Sunrider: US Customs Document

Fraud case (Simon Pak was the expert witness consultant for the U.S. Attorney’s office along with Dr. John Zdanowitz)

Price Filter Application to a Court Case


Other mushroomsTSUSA: 0712302000(KG) CHINA(TAIWAN)

8902

23

8904

20

8905

16

8908

14

8909

20

8910

19

8910

25

8910

26

8910

26

8910

31

8912

08

9002

14

9003

02

9004

04

9007

06

9007

19

9008

09

9008

28

9010

10

9010

19

9011

21

9012

06

9012

24

9101

10$0

$20

$40

$60

$80

$100

$120

Price I Price-rev Price II UpQ-country UpQ-world

Chart 5-1: Proportion of Imports with Prices Higher Than U.S. - Country Upper Quartile Prices

53%

95% 82%

53%

89%83%

Period 1 - Orig Period 1 - Rev Period 2 - Orig0%

20%

40%

60%

80%

100%

No. of Trans. $ Amount

Chart 5-2: Proportion of Imports with Prices Higher Than U.S.- World Upper Quartile Prices

61%

97%86%

50%

96% 92%

Period 1 - Orig Period 1 - Rev Period 2 - Orig0%

20%

40%

60%

80%

100%

No. of Trans. $ Amount


IRS vs. Chen/Sunrider On the IRS Section 482 violation charge, Mr.

Chen paid IRS over $48 million for tax and penalty (6 Transfer Pricing Report 842, 3/25/98)

According to the Wall Street Journal (7/3/1997), Mr. Chen paid $93 million without admitting any wrongdoing.

The US vs. Chen/SunriderOn the Customs Document Fraud charge,Mr. Chen Paid $4 million fine to US Customs

and sentenced to a two-year jail term

Chen/Sunrider case - The Results


Limitations of Price Matrix Filter Approach

For highly heterogeneous HS10 categories

The price filter matrix may introduce biases Wider upper/lower quartile ranges mitigate

the biase problem somewhat Aggregated data

By HS10, Month, Country, and Customs District

No distinction between Related party transactions v.s. unrelated

party transactions HS10 categories without quantity

reported No price filter matrix can be constructed


Limitations of Price Matrix Filter Approach

Inter-quartile price range is somewhat arbitrary

Automatically classify top 25% and bottom 25% as abnormally priced

But the U.S. IRS transfer pricing regulation (IRC 482) specifies that an inter-quartile range is an acceptable arm's length transaction range


Why use Price Filter Matrix?

A good first-order approximation in estimating abnormality

Detection of abnormality The price filter approach based on the inter-

quartile range is an effective initial step in investigating and identifying truly abnormally priced trades

Needs follow-up inspections


Proper Application of Price Filter Matrix

Examine the frequency of abnormally priced trades for a particular importer or exporter The probability of a randomly selected

transaction to be above upper-, or below lower-quartile range is 25%.

The probability for a half or more of 100 transactions to be above upper-, or below lower-quartile range is 1 in 47 million chances!

Therefore, the price filter approach based on the inter-quartile range can be an effective tool in detecting importers/exporters with frequent mispriced transactions.


Other Factors in detecting Suspicious Cargo

Easy computerized detection:• Suspiciously high/low shipping cost

per unit weight• Abnormal weight: a spark plug

weighting 4 pounds?


What about High Shipping Cost?

Why would Shipping Costs be higher than Customs Values? For Exporters: Another way of moving

capital/wealth through trade For Importers:

Raise the cost of goods reducing taxable income Reduce customs duty


High Shipping Cost > Customs Value ?2006 US Imports (freight/insurance charge)

ItemExporting Country

Amount (Customs

Value)QTY Unit Freq

Shipping Cost

Weight (KG)

Ship’g Cost/KG

Ship’g Method

Reference Average Shipping Cost /KG

Month

Customs Dist (entry)

MEN'S COTTON OTHER T-SHIRTS, KNITTED OR CROCHETED

El Salvador $14,463 482DOZ 12 $32,364 1,714 $18.88 Air $1.40 07 Cleveland

SACKS & BAGS OF OTHER PLASTICS

Indonesia $4,200 1,840 KG 1 $23,552 1,840 $12.80 Air $3.40 11 Cleveland

THERMOSTATS, NESOI China $205,095 106 NO 1$205,15

51,164 $176.25 Air $3.22 12 Minneapolis

STATIC CONVERTERS FOR TELECOMMUNICATION APPARATUS

Korea, South

$228,100 52,100 NO 3$229,64

05,438 $42.23 Air $3.04 08

Dallas/Fort Worth

BOOKS, BROCHURES, LEAFLETS AND SIMILAR PRINTED MATTER

Egypt $4,200 950 KG 1 $18,630 1,000 $18.63 Air $2.06 06 Chicago

GEMSTONES, CUT BUT NOT SET SUITABLE FOR USE IN JEWELRY

South Africa

$7,500 X 1 $23,625 15 $1,575.00 Air $2.99 02Washington

DC

BALL POINT PENS China $390,232584,956 NO 79$409,19

916,358 $25.02 Ocean $0.20 05 Los Angeles

POLYSULFIDES, POLYSULFONES Germany $175,401 8,000 KG 1$905,28

28,616 $105.07 Ocean $0.11 03 Norfolk

FIGURINES OF SEMIPRECIOUS STONE

Congo Brazzaville

$3,000 X 1 $6,545 313 $20.91 Ocean $0.01 12 Nogales


SUMMARY

Abnormally high or low priced trades May be due to:

Recording error Product heterogeneity in a given HS

code Transfer pricing & tax avoidance Money laundering Capital flight Duty fraud

Impacts on the country Reduced tax revenue Capital flight Distort balance of trade statistics


SUMMARY

Price Filter Matrix Can be built for each HS code & country

combination May be effective in identifying abnormally

priced import and export transactions when combined with inspection by customs specialists

Can be used for real-time inspection of cargo

A case study of abnormally priced trades between the U.S. and the LAC Methodology, results, and...

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